This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

October 21, 2013

Succession Planning by the (Hard) Numbers

In an early-morning talk, the multiples to be gained made sleepy advisors sit up and take notice

“Over 100 people at a presentation about succession planning at 7:30 on a Sunday morning shows you the commitment to the topic.”

“The multiples when it comes to the value of a firm can be as high as 10 times,” Welsh said. “That means $50,000 in cash flow suddenly becomes a $500,000 asset.”

He noted the aforementioned goodwill of the client base is what drives success, but if that goodwill is represented by documents and processes “that are a mess,” why wouldn’t the advisor spend $20,000 or $30,000 in technology to help clean it up and ready the firm for sale?

“Think about something like a document management system and the ROI it can bring,” he explained. “It helps to establish compliance processes and reduce costs, enhances productivity, reduces overhead, streamlines workflow and makes life fun again.”

Technology integration results in 20% more annual income and 30% higher operating profit, he noted. Workflow automation results in back-office savings of 5% of revenues. With a document management system, savings to overhead equals 9% of revenues.

“This is often the advisor’s biggest asset, and they get one shot at monetizing it for retirement, so they better do it right,” he added.

He also pointed to “the people with capital behind them” that also see the opportunity in purchasing advisory firms, and in many cases flipping them.

“We tell advisors that if they have any excess cash, don’t put it in the stock market, put it into your business. Where else will you get that type of return?"

But in a nod to the cobbler’s shoeless children, he lamented the fact that so many advisors are unprepared.

“Half of all advisors are over the age of 55,” Welsh said. “Less than one-third has a plan in place. This lack of planning is creating urgency. Why? Because it takes between five and 10 years to implement a succession plan.

The time is now, he concluded. Invest in technology to drive systematization and efficiencies. It will increase the advisor’s business value and help create a transferable business.

“They haven’t planned," he said, "which is the ultimate irony for the planning profession.”